Oil Futures End Shallowly Mixed

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest to delivery and Intercontinental Exchange Brent crude took divergent paths Friday while registering large losses on the week. West Texas Intermediate settled unchanged Friday while down more than 6% on the week. All were pressured by weekly data showing U.S. commercial crude stocks reached an 11-month high in early November alongside a fresh record high in domestic production at 11.7 million bpd.

Nearest delivered WTI futures, with the September contract set for expiration at the close of Monday's trade, has declined every week in the fourth quarter, six weeks and counting, while oil companies continue to deploy rigs. Baker Hughes this afternoon reported a two-rig increase this week to 888, the most in operation since early March 2015, with 25 of those rigs added in the fourth quarter which compares with a two-rig count increase in the third quarter.

WTI futures gained in two sessions this week that followed a record 12-session decline through Tuesday, with the market still shaky. Key support is just above $55 bbl, with a decisive break targeting support just below $51 bbl. On Tuesday, WTI futures slumped to a $54.75 bbl one-year low. ICE January Brent futures is trading on either side of a $10 bbl premium to WTI, and erased 5% of its value since prior Friday.

The massive selloff in November is the result of several factors, including under reporting U.S. and world oil production by the Energy Information Administration, with EIA revising higher world output for this year by an astounding 1.22 million bpd earlier this month from its projection in October. The revision suggests an additional 445.3 million bbl of crude is available in 2018, with the realization coming with less than two months remaining in the year.

Crude production by the Organization of the Petroleum Exporting Countries reached a 32.9 million bpd 22-month high in October, with higher output by Saudi Arabia at 10.63 million bbl and by the United Arab Emirates, a Saudi ally, leading the monthly gains. The ramp up in output was timed to offset lost Iranian oil barrels amid U.S. sanctions on Iran's oil exports that took effect Nov. 5. However, the United States granted eight countries waivers from the sanctions, including Iran's two biggest customers, China and India, which undermined the sanctions. Reports suggest U.S. officials expect a roughly 900,000 bpd decline in Iran's oil exports through the first quarter 2019, about where the drop is now, and despite a goal to zero out those exports.

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The rush of supply has prompted the International Energy Agency to congratulate world oil producers for heading off a tight market in the fourth quarter, when in October they said a red warning light was flashing that could spike global oil prices and harm emerging economies. The Paris-based agency this week pointed to rapid inventory restocking by the 35 country bloc Organization for Economic Cooperation and Development of 630,000 bpd in the third quarter, a three-year high, and that global oil refineries will crank out more supply than demand requirements for the current quarter into 2019. Global oil demand peaks in the fourth quarter and is weakest in the first quarter.

The Saudis are reportedly seething at U.S. President Donald Trump for being duped into overproducing and potentially creating a supply glut in early 2019 that would further weigh on oil prices. Over the weekend, the Saudis announced a 500,000 bpd production cut for December and were calling for OPEC plus 10 non-OPEC producers including Russia to agree to cut output in 2019 when they meet in Vienna on Dec. 6. Initial discussions for a cut of 1.0 million bpd increased to 1.4 million bpd.

However, Russia is balking at the idea, with Russian Oil Minister Alexander Novak saying the market is now in balance, and producers shouldn't rush a decision on output quotas. Russian President Vladimir Putin provided political cover for OPEC late in the week, saying Russia would cooperate with OPEC on production goals. What that means isn't clear however, with reports suggesting Russia might push for a smaller output cut, or force others to cut production while they maintain their output rate. Russia produced 11.41 million bpd of crude in October, a post-Soviet high.

The sudden river of oil is flowing just as concerns over world economic growth heighten, triggering worry over global oil demand. Federal Reserve Chairman Jerome Powell said late this week that the U.S. economy was in good shape, but did highlight concerns over the global economy and their potential threat in 2019.

World economic growth has slowed under the strain of a U.S.-China trade dispute, a rising U.S. dollar that has exacerbated the financial pain for emerging economies with high debt, with the dollar strength also pushing costs for oil paid by companies outside the United States higher since oil trades globally in U.S. dollar denominations. The U.S. dollar weakened to a one-week low Friday after reaching a 17-month high earlier in the week.

Trump said on Friday he is optimistic the United States and China would reach a trade deal ahead of his meeting with China's president, Xi Jinping, on Nov. 30-Dec. 1 in Argentina at the G20 meeting. Trump's comments follow news China submitted a written response to U.S. demands regarding trade this week.

Both December and January WTI futures settled flat at $56.46 and $56.68 bbl, with the expiring December contract down $3.73 or 6.2% this week. ICE January Brent crude futures edged up $0.14 to $66.76 bbl, while down $3.42 or 4.9% from prior Friday.

NYMEX December ULSD futures ended flat, down four points at $2.0737 gallon, and lost 9.91cts or 4.6% of its value this week. December RBOB futures rose 2.04cts to settle at $1.5770 gallon and eased 4.44cts or 2.7% on the week.

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Brian Milne

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